China: A Keynesian Monster

I recently spent two weeks traveling in the People’s Republic of China (PRC), a vast country with many contrasts: old vs. new, poor vs. rich, traditional vs. modern, East vs. West. While it is a strange experience with many impressions, what’s most striking is the obvious and contradictory economic contrast between wealth and waste.

Chinese city skylines in the economic development zones consist of business district skyscrapers mixed high-rise apartment complexes at least 30 stories high. The latter exist in groups of a dozen or so buildings of identical designs shooting far up into the sky, sometimes placed in the outskirts to facilitate the city’s expansion or change travel patterns according to some (central) master plan for the city.

The boxy skylines are interrupted by vast numbers of tower cranes in the many construction projects that produce more high-rises and skyscrapers at impressive speeds. The city is conquering the countryside and devouring the surroundings much like a swarm of locusts.

This image is one of production, a society experiencing enormous economic growth and wealth creation.

But traveling as the day gives in to night shows a very different picture of these sprawling Chinese cities. While the setting sun makes the tower cranes stand out even more, what is obviously missing is the sign of civilization: artificial lighting. Many of these newly constructed buildings become silhouettes against the sunset that are as dark as a dead tree trunk.

One can stand in the middle of the city watching the glass-and-metal skyscrapers wrapped in neon lighting, as one would expect. Yet among them see many dark shapes of buildings that are empty – if not dead. These buildings are not necessarily new and move-in ready, they are simply uninhabited and unused.

This image is one of wasteful spending and immense economic errors. The contrast is as puzzling as it is scary. It tells us something important about the nature of the recent Chinese economic miracle: that it is fundamentally fake.

The Chinese economy obviously relies very heavily on state-sponsored, state-planned projects such as these constructions of buildings. It probably wouldn’t be much of an exaggeration to say that the Chinese economy is a Keynesian jobs project of outrageous scale, which also means that is as removed from real value creation as any Keynesian undertaking.

The much talked about “One belt, one road” project is the same thing on an international scale. The project aims to recreate the silk road with modern infrastructure, connecting the Far East with Europe via both land and water. Consisting of numerous infrastructure projects in about 60 countries and trade deals to leverage the projects, the OBOR is a political project to connect the East and the West. It is state-planned and state-sponsored, and intended to, at least during the build phase, create projects primarily for Chinese companies abroad (though the immediate effect seems to have been capital outflow). It will most likely boost Chinese GDP, just as intended, and will be a catastrophic failure due to its reliance on planning rather than markets. But as states tend to think of GDP statistics as actual economic growth, rather than as a crude and faulty measure of it, the project may seem like a success at first.

What China teaches us about economics and economic policy is the lesson that is generally not provided in college classrooms: the important distinction within production between value creation and capital consumption. The story of China’s economic development is to a great extent one of unsustainable, centrally planned growth specifically in terms of GDP — but a lack of sustainable value creation, capital accumulation, and entrepreneurship.

Production creates jobs even if what is produced is wasteful infrastructure projects, ghost cities, or only ghost buildings in otherwise inhabited cities. But those jobs only exist for as long as the projects are underway – that is, for as long as there is already created capital available to consume, domestically or attracted from abroad.

Per Bylund is Assistant Professor of Entrepreneurship and Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University.